Sources of growth and output gaps in New Zealand: New methods and evidence

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Abstract

We extend Fox, Kohli, and Warren (2002) by using alternative techniques to re-examine the sources of New Zealand's macroeconomic performance during the period 1983-2001. Specifically, a modified Diewert-Morrison decomposition is used to quantify the separate contributions from productivity growth and changes in factor utilization, the terms of trade and the trade balance to GDP growth. We also use a new Fisher-index decomposition to analyze the determinants of GDP growth. These techniques are adapted to identify sources of deviations of GDP from its trend. The results of these decompositions reveal that changes in domestic prices accounted for three-fifths of the growth of nominal GDP over the entire sample period. Capital accumulation and employment growth were wholly responsible for the real-output growth in this time frame. However, changes in total-factor productivity or in the terms of trade contributed importantly to changes in real net output and in an index of aggregate welfare in specific years. Finally, no one factor was primarily responsible for explaining changes in the nominal (or real) output gap over the whole period.

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